The “Dear Client” letter below is based on an actual email I sent to a client who, understandably, was concerned about his investment portfolio during this recent market decline.
I know many of you are struggling with the same concerns right now but may not have access to a financial advisor or a calmer head in your life to talk to in your time of need. As an advisor of 35 years I have plenty of experience talking people off the ledge when they are concerned about their investments - here’s how I have been counseling my own clients lately:
Dear Client,
So far, this is a fairly typical mid-term election year correction. A globally diversified portfolio is down a bit more than just the broad US market.
Having said that, it sucks. While I cannot tell you how or when it will get better, all I can tell you is that it will. We have been using the weakness for tax-loss harvesting. We will rebalance as well.
I find comfort knowing that this is one of many temporary declines we will go through on the way to much higher stock prices. Prices that will not only go higher than you think they will, but higher than you can imagine.
My first collision was in 1987 - the October crash. Stock prices fell 22% in one day between sunup and sundown. Today when I recall that event, the Dow went from around 2200 to the 1700 range.
Since that bear market, I lived through bad events in the market in 1990 before the Gulf War, 1998 when it declined nearly 20% in less than two months, 2000, 2008, and 2016 (which was very close to a bear market).
I have learned to recognize the temporary nature, and as long as I remain patient, disciplined, and invested, they are never losses, per se.
However, temporary declines never feel temporary. We have a hard time seeing large amounts of money "seemingly" disappear. Yet actual losses take human intervention, i.e. you must sell your investments to generate a loss.
We invest in equities for their premium returns. Yet those premium returns come with premium fluctuation.
Better said, the premium returns are a result of the increased unpredictability of stock returns. One should not wish away the unpredictable nature of stock returns. Because if they get their wish...they will be left with the very low returns of predictable investments (bonds), which provide returns, net of taxes and inflation of near zero.
If history is any guide, there is a roughly 3 out of 4 chance that a year from now, much and perhaps all of today's decline will disappear. However as any financial reader knows, past performance is not necessarily an indication of future results. Having said that, one must be prepared, if not anticipate, lower levels yet. We may not get them, but they could visit.
In the end, the dominant determinant of long-term, real-life investment outcomes is not investment performance, but investor behavior.
I am amazed when I see headlines that suggest people flee from the great companies of the world. But I recognize that the impulse to flee the market in advance of, or even during, a significant market decline is both very human and very irrational.
Human nature is a failed investor - that much I know.
So here I stand, between my clients’ desire to do something, and actually doing something. It is the only hope they have. Great financial advice in general, and great investment advice in particular, can be counterintuitive.
Finally, this is just a terrible time period across the board, with some areas worse than others. But this too shall pass.
Write down how you feel today. Because a few years from now (or sooner) you won't be able to remember what you were worried about.
- Paul
